Mark Scheme (Results) January 2016 Pearson Edexcel IAL in Accounting (WAC02) Paper 01
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General Marking Guidance All candidates must receive the same treatment. Examiners must mark the first candidate in exactly the same way as they mark the last. Mark schemes should be applied positively. Candidates must be rewarded for what they have shown they can do rather than penalised for omissions. Examiners should mark according to the mark scheme not according to their perception of where the grade boundaries may lie. There is no ceiling on achievement. All marks on the mark scheme should be used appropriately. All the marks on the mark scheme are designed to be awarded. Examiners should always award full marks if deserved, i.e. if the answer matches the mark scheme. Examiners should also be prepared to award zero marks if the candidate s response is not worthy of credit according to the mark scheme. Where some judgement is required, mark schemes will provide the principles by which marks will be awarded and exemplification may be limited. When examiners are in doubt regarding the application of the mark scheme to a candidate s response, the team leader must be consulted. Crossed out work should be marked UNLESS the candidate has replaced it with an alternative response.
SECTION A 1(a) Debit Credit m m (2) Property 40 Revaluation Reserve 40 (3) Statement of Comprehensive Income (SOCI) / Retained Earnings Ordinary Share Dividend/Dividend Payable Ordinary Share Dividend/Dividend Payable Bank 7 7 7 7 (4) General Reserve 25 SOCI / Retained Earnings (5) SOCI / Retained Earnings 30 Capital Replacement Reserve (6) SOCI / Retained Earnings 14 Ordinary Share Capital 1 25 30 14 (12)
(b) Figures are in millions 1 Ordinary Share Capital m Share Premium m Retained Earnings m General Reserve m Capital Replacement Reserve m Capital Redemption Reserve m Revaluation Reserve m Total Equity m Balance at 1 January 2015 700 140 35 25 144 1 044 Comprehensive Income for the Year Revaluation of property (8) 40 Final 2014 Dividend (7) Paid in year Transfer 25 (25) Transfer (30) 30 Bonus Issue of Ordinary 1 shares 14 (14) Balance at 31 December 2015 714 of 140 (need 2) of 1 of 0 of 30 (need 2) of 144 of 40 (need 2) of 1 069 of (16) (c) Shares issued at premium of (140m x 100) = 20% 700m So X shares at 20% premium to give 144m ie X x 1.2 = 144m X = 144m = 120m shares of C 1.2 (6) (d) Answers could include: (i) (ii) Increase in value of factory cannot be added to profit, because it is an unrealised gain. This would go against the concept/principles of realisation i.e. gain has not been realised until property is sold. Also goes against prudence. (4) Cannot be used to distribute as a dividend as in a capital reserve. (2)
(e) Answers may include For Bonus Issue Company has few funds available for dividends. Only 15m o/f in the Retained Earnings available. Shareholders are kept happy / quiet as they would have received free shares and these shares are eligible for dividends in the future. Maximum in Revenue reserves available for dividend is 15m o/f + 30m = 45m o/f but reluctant to pay the 30m in Capital Replacement as this is set aside to replace worn out machinery. Company may be short of liquid funds especially if they have made a loss. May attract new investors (if they hear about the bonus shares). Bonus shares could be lower in total than the dividend payable. Makes the company look stronger (SOFP) if shares issued from revenue reserves. Against Bonus Issue Bonus shares bring in no cash for the company. Issue of bonus shares sees share price fall Shareholders will be unhappy. Bonus shares will result in more shares eligible for dividends in the future so greater future payouts, or dividend per share may fall. The 14m could be used to give a dividend of 2 pence per share. It is possible to pay 6.43 pence per share maximum as a dividend from Revenue Reserves. If bonus shares are paid from revenue reserves this means there will be less funds available for future dividends/emergencies. Shares may fall in value in the future due to e.g. economic reasons so shareholders will be unhappy. Administration/professional costs will rise. Maximum of 8 for arguing one side. Conclusion Bonus issue may/may not be best option for company (12) (Total: 52 marks)
2(a)(i) W1 Cost of Sales Statement of Comprehensive Income for Direct factory labour 1 007 000 Jesorre Carpets plc for y/e 31 December 2015 Direct Materials 988 000 need 2 Less Discount Received (42 000) Revenue 5 472 000 Factory Depreciation 39 000 Machinery Depreciation 142 400 Cost of sales (2 176 400) o/f Inventory Adjustment 42 000 2 176 400 5 x Gross profit 3 295 600 o/f W2 Distribution Costs Distribution costs (2 539 320) o/f Advertising 175 000 Discount Allowed 105 000 Administrative expenses (677 000) o/f Rent on shop premises 424 000 Depreciation on motor vans 39 600 Financial cost (43 000) o/f Sales Commission 54 720 Transport costs 165 000 Profit on ordinary activities before tax 36 280 o/f Shop staff wages 135 7000 Transport staff wages 219 000 need 2 Corporation tax (10 000) 2 539 320 7 x Profit on ordinary activities after tax 26 280 o/f W3Administrative Expenses Bad Debts Written Off 23 000 Head office expenses 272 000 Total 25 x 9 x Head office staff 382 000 677 000 3 x W5 Financial cost Bank interest 43 000 1 x
(a)(ii) Statement of Financial Position of Jesorre Carpets plc as at 31 December 2015 ASSETS Non-current assets Property, Plant & Equipment Buildings Machinery Motor vans Current Assets Inventories Trade and Other Receivables Trade receivables Prepayments 1 474 000 of 569 600 of 59 400 of 2 103 000 889 000 241 000 24 000 265 000 Cash and Cash Equivalents Cash 38 000 38 000 1 192 000 Total Assets 3 295 000 EQUITY AND LIABILITIES Equity Share Capital Ordinary shares of 0.25 Retained Earnings Non-Current Liabilities Long Term Borrowings Long term bank loan Current Liabilities Trade and other Payables Trade Payables Other payables Short Term Borrowings Bank 2 000 000 786 500 of 2 786 500 200 000 200 000 274 000 19 000 293 000 5 500 Current Tax Payable Corporation Tax Payable Total Equity and Liabilities 10 000 308 500 3 295 000 C Total 15 x
2 (b) Answers may include: Case For Directors Report Report gives information to e.g. shareholders which they could use to make a decision e.g. invest more funds in the company. Shareholders / readers may be assured the company is acting in an ethical manner. Other stakeholders e.g. pressure group may use information in the Report to bring about change in company policy e.g. treatment of disabled. Disclosures may be required under Stock Exchange regulations, which may be appropriate in the Directors Report e.g. legislation pending. The Director s Report could be considered part of the corporate governance. Information is given to shareholders which allows them to see in some detail how the company is performing E.g.company performance/principal activities, review of the position of the business Post balance sheet events, future developments Names of directors, interests of directors Employee involvement, disabled employees policy Political and charitable donations Creditor payment policy, creditor payment days (Maximum of 4 marks for listing of items contained in Report) Case Against Directors Report Report costs personnel time to prepare and money to print etc. Directors may use Report to window dress the accounts, ie give an inaccurate/unrealistic positive view of the company, as it is in their interest to do so. There is a time delay before the Directors Report is published so events may have changed. Maximum 8 Marks for arguing one side only Conclusion 2 Marks Should relate to above points. E.g. Directors Report is useful. (12) (Total: 52 marks)
3 (a) (i) Budgeted tap production = (10 x 40 x 4 x 3) = 4 800 (2) (ii) Actual brass used in production = 74 664 = 24 480 kgs 3.05 (3) (iii) Total direct production labour cost : Normal time = 10 x 40 x 4 x 6.60 = 10 560 Overtime = 10 x 1 x 4 x 9.90 = 396 Total 10 956 o/f (3) (b) (i) Materials usage variance = (24 000-24 480 o/f) x 3.20 = 1 536 Adverse o/f (4) Materials price variance = ( 3.20-3.05 ) x 24 480 o/f = 3 672 Favourable (4) Total materials variance = ( 1 536 Adverse + 3 672 Favourable) o/f = 2 136 Favourable o/f (2) (ii) Labour efficiency variance = (1 600-1 640 ) x 6.60 = 264 Adverse (4) Labour rate variance = ( 6.60-10 956 ) x 1 640 = 132 Adverse 1 640 (4) Total labour variance = ( 264 Adverse + 132 Adverse) o/f = 396 Adverse o/f (2) (c) Sales = 4 800 o/f x 39.96 = 191 808 o/f Less Materials Cost = 74 664 Labour Cost = 10 956 o/f Fixed Cost = 19 200 104 820 Profit = 86 988 o/f (5)
(d) Cost of producing one tap : Material cost = 5 x 3.20 = 16.00 Labour cost = 6.60 = 2.20 3 Fixed cost = 19 200 = 4.00 4 800 o/f Total cost per tap = 22.20 o/f Selling price per tap = 39.96 Mark-up per tap = 17.76 o/f Mark-up percentage = ( 17.76 o/f x 100 ) = 80% o/f ( 22.20) (e) (7) Keeping the same percentage mark-up FOR: Result will be a fall in price of 0.65 and this may lead to more customers and an overall increase in sales revenue. New price may be below that of rival firms which may be crucial if market is competitive. AGAINST: The profit measured in s per item sold will decrease and this may reduce overall profit even if more items are sold. Demand may be price inelastic, and there may be only a small rise in demand if price falls. Price will be lower so consumers may think quality is lower. Keeping the same selling price FOR: Customers will not be aware of fall in production costs so are unlikely to feel unhappy especially given inflation/rising prices Profit will be higher because costs are lower Easier to keep same selling price, inertia AGAINST: Price could mean firm s price higher than rivals so there may be a fall in customers Maximum of 8 for one side of argument. Conclusion Keeping same percentage mark up is correct/incorrect (12) (Total: 52 marks)
SECTION B 4 (a) Fixed Costs (620 x 12) + 560 (both) + (275 x 12 ) + (65 x 12) (both) = 12 080 Variable Costs = 30 Contribution Break-even point ( 110-30) = 80 o/f 12 080 o/f 80 = 151 o/f (b) Sales 240 x 110 = 26 400 Less Fixed Costs = ( 12 080) o/f Less Variable Costs (240 x 30) = ( 7 200) o/f = Profit = 7 120 o/f 8 marks OR Contribution x Sales ( 80 x 240) = 19 200 o/f Less fixed Costs ( 12 080) o/f = Profit 7 120 o/f 4 marks (c) Fixed Costs ( 400 + 720) + (40 x 12) = 1600 o/f Variable Costs = 30 Contribution ( 110-30) = 80 o/f Break-even point 1600 o/f 80 o/f = 20 o/f 8 marks (d) Sales 96 x 110 = 10 560 Less Fixed Costs = ( 1 600) o/f Less Variable Costs (96 x 30) = ( 2 880) o/f = Profit = 6 080 o/f OR Contribution x Sales ( 80 x 96) = 7 680 o/f Less fixed Costs ( 1 600) o/f = Profit 6 080 o/f 4 marks
(e) For closing shop and working from home Break-even point is lower by 131 units o/f because fixed costs are much lower. It may be possible to build up sales by advertising and word of mouth recommendations etc. Flexibility/relax etc. working from home. For keeping shop open Profit is higher (using 2015 figure) by 1 040 o/f. Because the loan is paid off 3 300 interest will not be paid so profit is would be higher by 4 340 in 2016 which is more realistic. Will need to buy a van for 4 000 if working from home. More chance of passing trade/ higher footfall as shop presence acts as an advert itself. Profit is more important than break-even. Margin of safety falls from 89 in 2015 (240-151) in the shop, to 76 (96-20) o/f if working from home in 2016 Maximum of 4 marks for argument of one side. Conclusion Should keep shop open (8) (Total: 32 marks)
5(a) Budget Statement of Comprehensive Income for February OUTPUT 1400 1500 1600 Revenue 168 000 171 000 173 280 Materials 33 600 30 600 27 744 Labour 25 200 29 700 34 848 Delivery 4 170 4 325 4 480 Power 2 660 2 750 2 840 Fixed Costs 26 800 26 800 26 800 (all three) Total Costs 92 430 o/f 94 175 o/f 96 712 o/f Profit 75 570 o/f 76 825 o/f 76 568 o/f 22 marks (b) Possible answers could include: Allow good decision making as like compared to like e.g. similar output levels. May save time and money by allowing Management by Exception i.e. action only if a variance at that output level. Allows workforce to meet target for given output level so motivates workforce. (2) (c) Output of 1500 units may be the best as it gives the highest profit o/f However, output of 1600 units probably means greatest market share and competitors will suffer. Output of 1 400 units gives the lowest figures for costs o/f 1600 units gives lowest costs per unit at 60.45 o/f with 1400 the highest at 66.02 o/f 1400 units gives the highest profit per unit at 53.98 o/f with 1600 the lowest at 47.86 o/f 1600 units gives the highest factory capacity utilisation figure, which means not so many assets are being left idle Output may simply be determined by demand. Output at 1 600 may see benefits of economies of scale. for example, spreading the fixed costs over a larger output. Maximum of 4 marks for arguing for only one output level. Conclusion 1500 units is the best output level as it gives the most profit 2 marks (8) (Total: 32 marks)
6 (a) (i) Provision for Depreciation account Date Details 000 Date Details 000 Dec 31 Disposals 360 Jan 1 Balance b/d 1 346 Dec 31 Disposals 210 Dec 31 Statement of 493 o/f Comprehensive Income Dec 31 Balance c/d 1 269 1 839 1 839 o/f (a) (ii) Statement of Cash Flow for y/e 31 December 2015 Cash Flows from operating activities Profit from operations (273 + 12 + 24 ) 309 000 Add Depreciation 493 000 o/f Less Profit on Sale of Non-current Asset (42 000) Add Loss on Sale of Non-current Asset 35 000 Operating cash flow before working capital changes 795 000 o/f Decrease in inventories 31 000 Less Increase in trade receivables (66 000) Less Decrease in trade payables (27 000) Cash generated from operations 733 000 o/f Less Interest Paid (12 + 24 ) (36 000) Less Tax Paid (323 000) Net Cash from Operating Activities 374 000 o/f (6) (15) (b) Items found in the Financing Activities section include: Issue of shares, premium on share issue, issue of debenture, taking out a bank loan, redemption of shares, repayment of a bank loan, repayment of a debenture, dividends paid, (and can include interest paid). One per correct item. (3)
(c) For statement Profit after interest was 273 000 Company has generated 374 000 o/f from Operating activities. Cash and cash equivalent has risen from ( 121 000) to 139 000, a rise of 260 000 Financing activities show an inflow of 44 000. 2014 current ratio is 1.69:1, acid ratio is 0.76:1 2015 current ratio is 2.05:1, acid ratio is 1.06:1 i.e. improved (or both current ratios correct = and both acid ratios = ) Against statement Financing activity shows a loan of 400 000 was taken out, which goes a long way to explain the improvement in liquidity in the year. Cash flow used in Investing Activities was an outflow of 158 000, however this could generate future inflows. Cash and cash equivalents at the end of 2015 are not enough to pay the current tax bill, although the position was worse in 2014. Maximum of arguing for one side 4 marks Conclusion Company has done well and liquidity position has improved. 2 marks (8) (Total: 32 marks)
7 (a) Sales Flights Passengers Weeks Sales Price Total Revenue Year 1 220 X 150 X 52 X 0.52 =892 320 Year 2 240 X 150 X 52 X 0.52 =973 440 Year 3 240 X 150 X 52 X 0.55 =1 029 600 Year 4 260 X 150 X 52 X 0.55 =1 115 400 Year 5 260 X 150 X 52 X 0.58 =1 176 240 Running costs Cost Weeks Depreciation Meal Cost Cash Outflow Year 1 (6 750 X 52) -235 000 + 429 000 =545 000 Year 2 (6 750 X 52) -235 000 + 468 000 =584 000 Year 3 (6 950 X 52) -235 000 + 468 000 =594 400 Year 4 (6 950 X 52) -235 000 + 507 000 =633 400 Year 5 (6 950 X 52) -235 000 + 507 000 =633 400 Net Cash Flow Total Net Cumulative Revenue Outflow Cash Flow Cash Flow Year 0-2 000 000 Year 1 (892 320-545 000) =347 320 o/f -1 652 680 Year 2 (973 440-584 000) =389 440 o/f -1 263 240 Year 3 (1029 600-594 400) =435 200 o/f -828 040 Year 4 (1 115 400-633 400) =482 000 o/f -346 040 Year 5 (1 176 240-633 400) =542 840 o/f 196 800 Payback period=4 years(346 040 o/f x 12) =4 years o/f 7.65 months o/f (542 840) (20) (b) Gearing ratio= Prior Charge Capital x100 = 1 500 000 x 100 = 75% o/f Capital Employed 2 000 000 (4)
(c) For statement The contract shows a positive cash flow every year. The contract makes a profit every year, even when depreciation is taken into account. The contract pays back in the fifth year. The contract has fixed prices agreed with the airline. As long as the airline stays in business the contract must be honoured by the airline therefore giving security to Gulf Catering. Against statement Some figures are only estimates e.g. cost of producing meals. The gearing ratio at 75% is very risky because it is over 50%. The airline could go out of business, so contract will be worthless. Payback is after more than four years, which may be considered quite lengthy. Maximum 4 marks for arguing only one side of the contract. Conclusion Company probably is taking a risk (8) (Total: 32 marks)
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